Morgan Stanley relatively overweight European stocks, but recommends some 'profit taking' in cyclicals

Strategists at Morgan Stanley continue to favour a "relative overweight" of European equities versus other regions even though global stocks more generally were now "more accurately pricing in the positive global macro outlook."

In a research note sent to clients at the weekend, Graham Secker said markets were likely due a breather with more two-way risk going forwards.

But there were three reason why European equities were expected to outperform.

Indeed, they had already beat the S&P 500 over the preceding six weeks, he pointed out.

First, Europe's economic momentum relative to other regions was set to improve over the coming months.

Looking further out as well, Europe was likely to be the only major economic region to see faster economic growth in 2022 than in 2021.

Second, valuations were also supportive, with the MSCI Europe Index trading near an eight-year low against the MSCI All Country World Index-ex-US.

It already looked "cheap" even if you left US peers out from the comparison, he said.

Lastly, there was less 'froth' in Europe, meaning that the region's equities were less "vulnerable" to a change in investor sentiment.

Yet Secker now also saw "few" remaining sources up potential double-digit upside in Europe from here on out.

Hence, his recommendation to clients was to also book profits in some of their cyclical outperformers and to look for some more defensive names offering reasonable growth at a similarly reasonable price.

Nevertheless, the strategist added that it was not yet time for a more significant rotation towards defensives, something that historically had required a peak in the yield curve which still felt some distance away and would likely require materially higher bond yields.